An annuity is a type of insurance service. In general terms, in an annuity contract, an insurance company and an annuitant contract for the annuitant to make one or more payments to the insurance company. For that consideration, the insurance company makes periodic payments to an annuitant. By way of example, the insurance company may be obliged to make a payment of a predetermined amount to the annuitant annually for a predetermined time period. In another example, the insurance company is obliged to make payments of a predetermined amount to the annuitant annually for the life of the annuitant. Annuities may also be provided that are intended to reflect gains available with securities markets. Such annuities are generally referred to as variable annuities. The asset value of a variable annuity may be dependent on changes in value of a mutual fund, a stock index, or another investment vehicle.
The costs charged by the insurance company in association with an annuity contract must be disclosed by regulation. In a variable annuity, the charges include at least a mortality and expense charge, an administration charge, and a fund expense. A mortality and expense charge arises from the insurance risks assumed by the insurance company, as well as commissions, selling and certain administrative expenses. An administration charge is generally applied to variable annuity accounts, to cover administrative expenses of the insurance company on an ongoing basis. Fund expenses generally represent fees of a money manager who is engaged by the insurance company. Fund expenses may include a management fee, a distribution or 12b-1 fee, and other expenses.
In addition, an annuitant may select one or more optional riders to be associated with the variable annuity. An example of a rider is a rider to provide a guaranteed minimum withdrawal benefit (GMWB); a GMWB rider provides protection against declines in asset value of the variable annuity. The costs of riders are often paid for out of annual fees based on the asset value of the variable annuity.